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UBS Is Subject to the Madness of the Markets Too

(Bloomberg Opinion) -- Sergio Ermotti will hope that the selloff battering global markets is merely a “healthy correction,” as some investors have described it, rather than something more serious.

The past five years have seen the boss of UBS Group AG deliver on a promise of reliable returns and dividend payouts, largely by boosting his wealth management business at the expense of investment banking. On Thursday, he painted a similar vision of the future. New money will keep flowing in from Asia’s rising millionaire class, costs will come down, and the profitable investment bank will be kept on a tight leash. Pretax profit growth in global wealth management, the biggest UBS unit, is targeted at 10 to 15 percent between 2019 and 2021.

The confidence was backed up by a robust set of third-quarter results. Revenues increased, earnings rose by almost a third and operating expenses were at their lowest quarterly level since at least 2016. The investment bank, which is trying to keep an aura of business-as-usual after the announced departure of boss Andrea Orcel to Spain’s Santander, reported a 44 percent rise in pretax profit and revenue growth in both fixed income and equities trading.

But the pressure from jittery markets is rising as the fourth quarter starts. The wealth management division makes money from bringing in client funds but also from client trading, and the latter is suffering. Transaction revenues fell 12 percent in the third quarter, to 623 million Swiss francs ($624 million). At the investment bank, which is in fairness usually quieter in the latter half of the year, revenue from equity and bond underwriting fell. These are relatively small weak points, but can’t be ignored entirely.

UBS management is putting a positive spin on the impact of the selloff so far. Kirt Gardner, the finance director, admitted that clients essentially “froze” their trading in the third quarter, but said volatility was good for UBS’ own trading desks. Nor did any of this stop “large ticket inflows” from wealthy Asians. Indeed, the bank’s Asia wealth management business reported net new money of 8.4 billion Swiss francs, outpacing its European and U.S. arms.

But against a backdrop of already-low interest rates and tough competition for client money, there are other early warning signs. UBS’s net margin on invested assets was flat year-on-year, and pretax profit growth in wealth management was 3.3 percent, much slower than the double-digit advances we’ve grown used to. Should the stock market continue to falter, or the economy start to, UBS will need to fall back on cost cuts to keep investors on board.

If Ermotti is correct, UBS’s strong brand and dominant market share will continue to offer a haven for finance industry investors. But the final months of 2018 may test that thesis.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Lionel Laurent is a Bloomberg Opinion columnist covering finance and markets. He previously worked at Reuters and Forbes.